India's prospective homebuyers recently woke up to a tsunami of offers from real estate developers during the Dussehra and Diwali holidays, including astonishing perks such as Mercedes-Benz, BMW and Toyota cars, gold nuggets and foreign vacations. The Mumbai-based Cosmos Group offered a free one-bedroom home with every bungalow and premium flat at four upcoming projects.

The unprecedented offers have astonished prospective buyers. But the desperation moves are little more than a disguise for the current crisis engulfing India’s real estate sector. With profits eroding, a liquidity crunch and dwindling demand, property developers are facing their worst downturn since the turn of the century.

Seven major Indian cities face dying demand after the quarter that ended in September, according to a recent report on the office market by the global real estate consultant CB Richard Ellis. Leasing also has slowed significantly, the report says. Sales in all three major sectors – residential, office and retail – have declined. According to Richard Ellis, the Indian real estate investment market continues “to remain subdued amid economic worries.” High interest rates and inflation, the agency says, have negatively impacted investor demand.

“The situation is terrible at present and is only expected to grow worse,” says Kamal Morarka of New Delhi-based Ashiana Developers. “The impact of the global meltdown has dealt a sharp blow to the real estate sector which was already going through a turbulent patch.”

In view of the crisis gripping the real estate sector, harried members of the Confederation of Real Estate Developers Association of India recently met Finance Minster P. Chidambaram to ask for governmental intervention. The minister assured them that the government would urge banks to speed up lending as the sector is an “engine of growth” and corrective measures would be put in place.

India's housing market -- worth US$12 billion in 2005 – was forecast to grow exponentially to US$90 billion by 2015, but it has been sliding since summer. With interest spiraling on home loans and the severe liquidity crunch in the banking sector, banks are unwilling to lend. Further, with the Reserve Bank of India (RBI) tightening money supply and increasing interest rates to fight inflation, developers are being whipsawed. Banks too, are insecure about loan disbursals to real estate developers.

This has pushed up monthly home loan payments by nearly 50 per cent which has hit investors and pushed demand down to abysmal levels. Home loan interest rates have risen from 7.75 percent in 2004 to 12 percent plus now, cutting into the disposable income of the 90 percent of homeowners who opt for bank loans to buy.

Those still buying are on tight budgets. “The Rs4.5-7 million (US$90,000-120,000) housing segment which was once the most sought after, is a thing of the past,” says Pradeep Mittal of Mittal Property Associates. “We’re only getting enquiries in the Rp2.5-3.5 million bracket. This development has severely eroded our profits.”

The slump in the real estate sector is also trickling down to upcoming projects. Big-ticket infrastructure projects in India – glitzy malls, multiplexes, multi-million rupee residential dwellings that were all the rage in even tier 2 and tier 3 cities till last year – are now few and far between.

Most developers have deferred new projects till further correction takes place. Hindustan Construction Company, one of India's largest builders, for instance, has stalled three of its planned townships till interest rates start to fall. The global credit crunch has taken the sheen off large property firms like DLF and Unitech, whose market capitalization has eroded almost completely. DLF has lost four fifths of its market in the slump.

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Rajiv Singh, vice chairman of DLF on Friday called for a cut in mortgage rates, telling Bloomberg that “Mortgage rates in India are at 12 percent to 13 percent, about twice what they are in China. That is unrealistic.” He added that a recovery in the property market over the next six months hinges on lower rates to lure first-time buyers. “If rates are cut, the domestic demand itself will carry the country through this difficult period.''

Two of India’s most attractive destinations, Gurgaon and Faridabad on the fringes of New Delhi, are experiencing a severe drought of new projects. According to figures of the Haryana Country and Town Planning Department, as against 3,038 applications received by local authorities for group housing projects in Gurgaon in 2007, the numbers in 2008 have plummeted to363.

In the case of Faridabad, while 180 applications were received for group housing in 2007, the figure nosedived to 43 while in the case of commercial projects, numbers have dipped from 75 in 2007 to zilch this year.

Chandigarh, another once-vibrant real estate market, is seeing its worst downturn ever. The city’s aggressively promoted luxurious dwellings – Pride Asia, priced at Rs40 million to Rs60 million and Rs6 each that were aimed at the rich Punjabi diaspora – have failed to excite buyers and so far only 10 percent have been sold.

Much of India’s real estate development stems from off-shoring and outsourcing businesses such as call centers and programming houses. Several multinational companies had moved their organizational operations to India to capitalize on the country’s low manpower costs. However, in the wake of the US subprime crisis and an increasingly protectionist-sounding President-elect Barack Obama, India’s outsourcing units aren’t too optimistic of their future. Ergo, all expansion plans are on hold.

Another major blow for the Indian real estate sector has been dwindling demand from the Non-Resident Indian (NRI) constituency. This year, even the NRIs are avoiding coming home and are not evincing interest in investing in property, something that brokers look forward to every year.

Savvier developers are thus focusing on affordable housing. For instance, Omaxe, one of India’s largest developers, says it will develop 1 million affordable homes over the next five years.

“Affordable housing is the only segment that has escaped the downturn in the real estate market,” said an Omaxe official. “As this segment has seen the maximum demand potential in the near future, we’re focusing on it with vigor.”

South-based developer Puravankara has also floated a subsidiary, Provident, for its affordable housing segment. Private equity firm Red Fort Capital (RFC) plans to invest Rs430 million over the next two years in affordable housing on the outskirts of Bangalore and Hyderabad. Global private equity fund Warburg Pincus too, has announced an investment of Rs300 million in Jaipur-based Mannat Group company, Unique Affordable Homes, for projects in north and west India.

“The current market conditions suit only genuine property buyers. Speculators with short-term investments plans are a complete no-no at this time,” says real estate consultant Tarun Buddhiraja. The consultant states that since the main issue currently is affordability, what buyers are looking at is the overall price of the house and not their floor area. “Developers are cannily selling three-bed room flats with far smaller area sizes than earlier ones. This helps deflate the price of a flat and also keeps the clients happy.”

However, this has made property deals attractive for foreign investors. The current slowdown in India’s real estate sector – coupled with the US subprime crisis and China’s tightening its FDI policy -- has spurred growth-oriented investment opportunities in India for foreigners. Cities like Mumbai, Bangalore and the NCR region have emerged as attractive investment destinations.

Whatever else the slump in the Indian real estate sector may have done, it has brought much-needed sobriety to the industry. Hotelier Sonica Malhotra, owner of the MBD Radisson chain, sees the current scenario as a blessing in disguise.

“In the recent past, overenthusiastic developers announced too many projects without vetting them on various parameters including technical feasibility,” Malhotra said. “However, once the market correction takes place only the serious projects with economic viability will see themselves through. And this will be a great development for the Indian real estate market in the long run.”